London’s Construction Boom set to Continue

London seems to be in a perpetual state of reconstruction as supply increases to meet the demands of a population that is soon set to surpass its 1939 peak of 8.615 million.

London seems to be in a perpetual state of reconstruction as supply increases to meet the demands of a population that is soon set to surpass its 1939 peak of 8.615 million. The tower is considered the future for much of London’s new housing stock and consequently, London’s skyline is constantly shifting and set to continue changing, with more than 230 skyscraper projects of various shapes and sizes approved in the city, many to commence construction this year.

Construction activity has extended beyond core central London markets into the boroughs, particularly in areas where Crossrail2 stations are scheduled to open and operate from 2018 and both commercial and residential real estate is booming across Greater London.

Criticisms have been levelled at the government that residential construction is biased towards investor demand at the top-end of the market, with big ticket residential developments taking priority over affordable housing, currently at critical shortage levels throughout London.

However, with largely non-EU investors and private wealth funds dominating the buyer landscape and affordability issues plaguing domestic homebuyers across the UK, construction in London is very much driven by where the strongest demand exists.

Construction Costs in London Second Highest in the World

Property prices across Greater London have seen further growth in 2015, driven up by high demand levels and also spiralling construction costs. According to research by global programme managers Turner & Townsend, the most expensive place to build is New York with London coming close second, with construction costs expected to rise another 5% through the year.

Demand in London’s residential and commercial sectors is keeping a strained supply chain at full strength and despite having a workforce nearly 70% cheaper than New York’s, London’s overall cost of construction is just 4% lower, the research reveals.

There is potential risk of further price escalation as demand levels outstrip capacity in key trades and London may soon eclipse the US city. The International Construction Market Survey 2015 analyses input costs such as labour and materials to chart the average construction cost per m2 for both commercial and residential projects in 35 markets around the world.

Skills Shortage a Red Flag for Construction in London

Jon White, managing director of Turner & Townsend said: “Input costs are key with labour accounting for around 40% of the total cost in London. The comparison between London and New York is a tale of two booms; both cities have powerful financial sectors and are seeing steady price inflation amid intense development in both commercial and residential property.

“But despite its enormous labour cost advantage, London’s overall construction costs are barely any lower than New York’s. The UK construction industry has made great strides in expanding its capacity to meet booming demand but there continue to be skills shortages in several UK regions. The sector as a whole has more work to do to improve efficiency and productivity,” he added.

London’s Property set to remain an Investors’ Market

No matter how much prices continue to rise and construction costs remain at relatively high levels, London seems to be a perennial investment market for the world’s wealthiest. Buyer motivation is hard to gauge during a prolonged phase of volatility in FOREX markets and weak performance in real estate sectors outside the US and UK. Safe haven buying has weakened considerably in the face of a strong pound although Asian investors appear to have an insatiable appetite for British property, particularly in the capital.

As the property investment market grows and develops, more opportunities are presenting themselves to investors with relatively small amounts of capital available. Crowdfunding, ETFs and REITs are increasingly concentrating on residential development, with entry levels from as little as £1,000.

- Wednesday 26 August 2015

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